The Vanguard Verdict: How Advisors Boost Returns by 3%

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The Big Picture Retirement Show does not provide tax, legal, or financial advice. Listeners are encouraged to seek out their own advisors in these areas.

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Hey everyone, welcome to the Big Picture Retirement Show. I'm your host, Devin. Joined today by my co-host, John Ross. Howdy!

00:25
John, there is a value in having advisors on your team. And sometimes that value isn't really easy to quantify. You know, so for example, if I have a legal issue, right? And I go to you to get help, I may not be able to point to a specific dollar value that that help was worth. That's correct. And it's difficult sometimes to spend money when you can't quantify a direct value.

00:54
Right, especially when there's so many potential variables out there. You know, one thing I try to do a lot of times with, particularly with the estate planning, is I will try to equate some value, some tangible value out there. I might say, for example, our estimated average cost of completing a probate is, you know, between legal fees and other costs is $5,000.

01:23
Plus, it's a six-month delay from the time of death. But if we do this probate avoidance technique, maybe using a trust or something, and let's say that I charge, even let's just say that I charge $5,000 to set all of this up, right? And I can say, well, within this trust, we've got all these other things where there's going to be long-term care protections. We're planning for your beneficiaries and protecting the assets from divorcing spouses and all of these other things.

01:52
And even if you don't need all of that, it paid for itself by avoiding probate. Right? Yeah. Right. Because I'm trying to quantify some of this abstract legal advice. Yeah. You know, we've we spent all this time talking about long term care planning and asset protection for your beneficiaries and all of that. But again, those are very abstract. People are like, well, I may not ever need long term care. And, and all my kids are in great shape right now. Who knows if they'll, I don't know that they'll become disabled. So it's very hard for me to quantify. You know,

02:21
But I think that people are more likely to make good decisions. Right? I mean, I don't think having decent or even better good estate planning is a good decision. Right. It's beneficial. But quantifying it is hard. It is. And the inability to quantify it makes it hard to spend money on it. Because if I know how much a car costs, well, then I can decide whether or not it's worth...

02:48
the effort, right? How much more are the leather seats and how much am I willing to pay for that, right? And so it's easily quantifiable, but abstract things, particularly advice, very hard. It is, it is. And as you noted, there are some things that's easy to quantify. For example, my 2008 Toyota Tundra. I could sell that truck right now and it's in very good shape. I could probably sell it for $13,000, $14,000 with the mileage it has on it.

03:17
Which then means that in order for me to replace the utility value that that truck brings to me, I don't even know how much I would have to spend. 65? Maybe. 70? Yeah. A Tundra? That's getting scary. Yeah. So, you know. Although have you seen the new ones? Oh, I have. They look nice. Like the 2024 ones? The new ones? Yeah. Yeah, they look sweet. They look very nice. But I don't know that it's going to carry me the three miles to my house, to the office.

03:45
any differently than my current version does, right? And so when I'm making a judgment like that, and I have to say, well, I can't quantify the value of spending an extra $50,000, $60,000 on another vehicle, but that's because just about all the factors that I need to know are known, they're in front of me. And when you're seeking out advice and counsel, in many cases, those factors and advice is not nearly that apparent. There's the old, what you don't know.

04:15
is what hurts you. In a podcast not long ago, we were talking about how you could turn a $40 plumbing bill into a... Which by the way, I don't know who you use as a plumber that's 40 bucks, but... I said a $400 into a 1500. For some reason, I thought you said $40. So, all right, $400. That sounds more logical. And with that...

04:41
you know, what you don't know can absolutely hurt you. Like, I'm going to replace my own hot water heater and it takes me three days to do it and I still screw it up. Right? We've still got hot water coming out of the wrong tap. And I still have to hire the plumber to come fix my mistakes. So now I've got my cost plus the plumber. Yes. Those kinds of things are fairly easy to figure out too, but there is a value, you know, there's a scripture that says in the multitude of counselors, there is safety.

05:11
And I think that is true if you have the right counselors on your team. And Vanguard has been putting out this study for the last number of years. And I just read their updated version of this and it's about, I don't know, it's a 50 or 60 page paper, maybe, maybe a 30 page, I don't know, somewhere in that range, but it's a long kind of academic type paper that goes into quantifying the value.

05:37
of advice. And in their case, they're specifically talking about financial advice from a financial advisor, which is ironic coming from Vanguard. Right, right. I mean, that's kind of then their whole platform is, historically, is you don't need the advisor. Right. Do it yourself. DIY. That's where the DIY investor was kind of born, was by using the Vanguard funds and then the index funds got popular.

06:05
And all of a sudden, a lot of people out there decided that, pfft, I don't need my Edward Jones advisor, my Merrill Lynch advisor. I can do this on my own. Yep. And a lot of people started doing it on their own and then found out this works. Right. I can do this on my own. It in fact worked. Yes. I didn't need that guy in a suit to tell me how to invest my money. And then we see this study come out from Vanguard that says, hey, wait a minute, actually, no, we can quantify

06:34
that there's about a 3% excess return from using a financial advisor over doing it yourself. It reminds me of a study that I saw some time ago that compared the average return of the market against the average return of the individual investor. And it's just pathetically low with the average investor compared to the market. And the study goes on to say why it's low.

07:04
you know, time in the market, they're making bad decisions, so on and so forth. So when I saw this study from Vanguard, I said, okay, I'm going to dive into it, because I've seen it floating around out there before, but I've never really read this. And what got me curious is when I read the comment that, okay, we can quantify at least 3% in value that a financial advisor can add, if not more. Right, if not more. And then on page four of that report, they actually have a handy little chart.

07:34
that shows where that extra value comes from. And that's where it gets interesting. And so the, and they had this broken down into basis points, all right? So one basis point is one one hundredth of a percent. So if you have, you know, 30 basis points, that's 0.3 of a percent. Right. So they have it broken down into, you know, here's what an advisor can add. And here's the, here's the number of basis points that that can add.

08:02
to your average annual return. And the first is suitable asset allocation using broadly diversified fines and ETFs. Well, what they have is greater than zero basis points. So it's, there's, there's some, you know, I think in the statistical world, they would say there's, there's some indications that it's better than nothing. Right. And what they say in a footnote is that the value is deemed significant, but

08:32
too unique to each investor to quantify. So they've just used zero and I suppose that's why they use the language, it could be 3% or higher. Right. But at least, at least if you're just talking about, you know, I mean, I think basically what this point is saying is that if I get on there, me myself and I get on there and I just, I just, you know, hinpeck some, some very common index type mutual funds.

09:01
compared to say, going to a financial advisor whose only job is going to pick out some mutual funds. Right. It's almost six and one half dozen of the other. Quite possibly. Quite possibly. Yes, quite possibly. Depending on the investor. Yes, absolutely. And their level of knowledge and how much they've researched it, so on and so forth. That's right. There may be no difference. There could be no difference.

09:27
or maybe slight difference. The second point is the cost effective implementation, which they say could add 30 basis points. So nearly a third of 1% in average annual return. And that's the expense ratios. Right, this is those hidden costs. Yeah, yeah. And you know, the funny thing is that I still find that so many people don't know about these expense ratios, and they are often referred to as just what you said, hidden costs, but they're not hidden.

09:53
No, they're out there. I mean, it's not like the fund company sends you a letter with it in highlighting that says, hey, your fund expenses X, you have to find it. But it's available, Yahoo Finance, Morningstar, any of those sites will have the annual fund expense right there. And I've seen different mutual fund companies out there, for example, they'll have an S&P 500 mutual fund, and they may be charging 0.15, 0.20 for the administration of that fund.

10:22
And there's absolutely no reason to pay that when you can get Vanguard's S&P 500 index for 0.03% in average annual expense. Absolutely. Just to cover their administration. So sometimes if you're out there choosing your own investments, you could get one that is slightly more expensive. And they say that should add about 30 basis points. But yeah, that's where an advisor is what you're saying, though, is an advisor is often going to look at that for you. They should.

10:51
They should. In theory. Unless they're selling their firm's proprietary mutual funds. Of course. In which case, that would likely go in reverse. All right. Fair enough. And then the third point is rebalancing, where they believe that the rebalancing of the portfolio can add an extra 0.14% in average annual return. Now that's, for example, John, let's say that you come in and we say, John, you need to have 10% of your portfolio's value in mid-cap stocks.

11:20
20% in international and we'll just stop there, right? So the let's say that mid cap stocks really start to move and they're doing fantastic. And then we look at your portfolio, now you have 12% in mid cap stocks, your international on the other hand has dropped. Right? Well, the rebalancing just brings everything back to the allocation where it needs to be. That's as simple as it is. That's all that is. And that can be, you know, for an individual portfolio, you can go through and you can do that individually. But

11:49
It is something that we see that there's a lot of portfolio drift that happens because, you know, if you take these markets that move, then over time, people are way out of whack with what they thought they had in their portfolio as a percentage. So the rebalancing is very important. Now, here's the, these next points really don't deal with pure investment management. And this is where we see some of the big potential for increased returns. And to that point, you know, we did an

12:19
is your investment advisor worth 1%? Which I've gotten a lot of feedback on, by the way. Oh, good. Yeah, so there's clients that's listened to it and said, I've decided that, Devin, you are in fact correct. My advisor is not worth 1%. I had some advisors who weren't real happy. Unsubscribe. And I get it. I get it. And my goal is not to throw any investment people under the bus. But I just want to reiterate, if all your investment advisor is doing is providing investment-related activity,

12:47
Yeah, they're not worth that 1% you're paying at all. Because we can add up. We've got 30 basis points from cost effective implementation, 14 basis points for rebalancing. Well, that's 44 basis points. That's not even 1 half of 1%. And so if you're paying 1% and that's the value you're getting, well, you are going in reverse. That's right. Even if they're doing a bang up job of that, you're still going in reverse. Correct. It's the next points that get more into.

13:13
the planning side and away from the investment management side. So the fourth issue is behavioral coaching. Now, that's actually a bigger deal than some people think. And this would be like eat right and exercise, right? Yeah. It's that kind of behavior? Yeah. Well, if you were a health coach, that's the kind of advice you would give someone, right? Or if you were their fitness person. But in this sense, it's.

13:42
I know interest rates are going up. I know the market's been volatile, but let's get some perspective. Let's look at how these have played out in the past. And oh, by the way, Mr. Ms. Client don't believe that this time is different because it's not. The facts and circumstances may be slightly different, but the outcome is likely to be very close to the same. You pull the plan back out. You show them how under even with the revised numbers, with your portfolio down, look, you're still okay. Let's

14:08
Get that perspective, that long-term perspective back into this. Turn off Fox News, turn off MSNBC, CNBC, whatever version of news pornography it is that you're intaking and quit worrying about it so much. And, you know, as a result, then what do they tend to do? Your clients go, okay, well, if that's what you think we need to do, that's what we'll do. Right. And that result right there, almost always, if you have good quality investments.

14:37
It almost always works out better than a knee-jerk reaction to getting in and out of the market. Period. Being able to go back and say, look, this is normal. This is natural. One out of every four years, the market's down. We're going to make some lemonade out of the lemons that we're getting. In your taxable account, let's do some tax loss harvesting. That's going to pay you dividends for years into the future. Whatever it is, that behavioral coaching is really, really, really important. And they say that that adds between 0 and 200 basis points. That's 2%.

15:07
Yes, it is. In fact, they have a greater than 2%. Yes. So, you know, I often tell people, you know, when I'm talking about mistakes that I made as a as a financial advisor, especially a baby financial advisor. And I think one of the biggest mistakes I made was in the early days, you know, I got into the business in 2002. And so we had just come through the 2000 through 2002 bear market with the dot com crash and everyone was still really skittish, really skittish. And

15:37
at the least sign of volatility in the market, you would have people ready to go to cash because they thought here we go again, we can't do this again, Devin. You know, we lost almost everything because we bought pets.com or whatever it was, you know. And looking back, I have to say that one of the biggest mistakes during that time was not being more convincing to them to stay the course.

16:03
And to letting some of those winds that were filling their cells also fill my cells and blow me around a little bit. And it was my first experience coming through a bear market and I didn't really know what to expect. You know, was I doing them a disservice by leaving them invested in the market was going to go down for the next two years and they were going to be looking at me, blaming me for losing all the retirement savings they have. And when we got through that market and into about 2006, 2007 ish,

16:30
That's when I realized that, okay, next bear market, I'm going to do this differently. So 2008, 2009, he had financial crosses, nearly had financial Armageddon, as I heard one of the analysts put it back during that time. And I was able to keep most of my clients invested and balance portfolio, staying invested and most of them were fine. They came through it and everything was, was fine within just a short period of time thereafter. And from that point, that's when I became resolute.

16:59
Right. That moving forward, here's my answer. This is the answer that I'm applying to my own dollars. It's backed up now by decades of statistics. It's backed up by numerous academic studies. This is what we are going to do. And I'm going to be very, very, very convincing about it. Absolutely. And that's where that's where you're going to add that 2% or potentially greater. Absolutely. To simply keep them from making a mistake. Yep.

17:29
And then we have asset location. Oh, this is one that a lot of people don't think about. Now, Vanguard says this is between zero and 60% in excess returns. Zero and 60 basis points. Yeah, zero and 60 basis points. Not 60%, yes. The asset location approach is simply this. John, we were talking earlier about tax-free binds. We were, yes. And how tax-free binds in your non-taxable account can make a lot of sense, especially with yields right now. Depending on your tax rate.

17:59
and we were talking about your astronomically high tax rate and how you know, the tax equivalent yield was really high. Right. Yeah. So you've got the interest rate plus your tax savings because it's interest, it's tax free interest. Right. And so, you know, we can do CDs five ish percent, or you could do tax free bonds. That's tax free. Now, those aren't those aren't the right decisions for everyone. Right. But for those people that it's right for, you're going to get a 1099 with all of that taxable interest on it.

18:29
for all of those CDs. And by the way, I think 2023, when people start filing their taxes for 2023, they're going to be shocked at the interest income because they just haven't had to contend with that for so many years. And now they've got their Vanguard money markets, or Fidelity money markets, or whatever it is, and all this stuff's paying them 5%. In the years past, it was barely a blip on the radar. And now it's this big sum of income that's coming in.

18:57
And it's going to make a very real difference. So, you know, maybe switching that to the tax-free bonds would make a difference, but that's not really what asset location even is. Maybe asset location is, Hey, look, you've got all of your income producing investments in your taxable account right now. And let's assume John, that you come to me and you say, Devin, I'm getting old, which would be true. Right. And you say, I want a 50-50 mixture in my accounts. I want 50% bonds, 50% stocks.

19:27
That's just what I feel comfortable with. There's a couple of approaches that we could take there. One is we could divide everything 50-50. We could build this one model and apply it equally to all of your accounts. Right, both pre-tax and after-tax. Absolutely. And so your after-tax accounts would have some bonds and some stocks, and your pre-tax account would have some bonds and some stocks. Or we could be a little bit more strategic and say, okay, let's just assume that your after-tax and pre-tax accounts are identical.

19:57
Well, let's load your pre-tax accounts up with the income producing investments, right? Because it's not really going to make any difference there. Right. You're not going to get a 1099 on it unless you take a distribution. And if you take a distribution, guess what? It's all taxable income anyway. Whereas in your taxable account, you're going to have dividends and maybe some capital gains that come out, but you're not going to have those bonds or CDs sitting there churning out 5% of half of that value. And so it can make a really big difference.

20:25
how you locate those assets as well. And so I understand how they say that can add an extra 60 basis points to the return, because that's effectively tax savings by having the right location. And then spending strategy, the withdrawal order between zero and 120 basis points. So that's, that can be anywhere from up to 1.2% no benefit to that 1.2%. And it's something that I see that is usually miscalculated for a lot of people.

20:55
They just think, I've got these accounts, I'll start pulling money out of them. And that's usually not the most tax efficient way. So there's a way to do it. Oh, there absolutely is. And there is a way to do it for you. For sure. You just need to know which one it is. Absolutely. What it is. That's the vast majority of people retire with those three buckets. You know, they're going to have a taxable account, which is that account. Maybe that's a joint account or a trust account or something like that. They get a 10 99 on it every year for the taxes and are for the dividends and interest income, capital gains.

21:23
Then they're going to have their pre-tax account. That's usually the largest account. That's where they've been saving money in their job for all these years. And then they're probably going to have a smaller account. That's a Roth IRA. And, you know, maybe they just started that. So, uh, in many cases we'll see those accounts where there may be five, up to 10% of their total package. And so then when they, when they retire, they just say, well, I've got this money. Which bucket do I start pulling it out of first? You know, certainly pulling it out in a pro rata fashion typically is horrible.

21:53
on your taxes and the efficiency and the longevity of the portfolio. So there is a way to do that and getting that advice on how to do that they say is worth up to 120 basis points. And then the last one is the total return versus income investing. You know, that that's another one that they just have greater than zero. Again, they can't really quantify it because it's so individualized. Sure. But that's just people that say, Okay, look, Devin, let's, I need to get $6,000 a month.

22:22
in income. And so you go out and you buy enough bonds to give them $6,000 a month in income. Or you just say, well, let's keep your money invested and just take a $6,000 distribution. Let's keep it invested in, you know, stocks and we'll sell sell stock as necessary to generate distributable cash. Yeah. And so that could also be another really big one, especially when the markets are doing well. So when you add all of that up, you come up to what they say on the bottom is up to or even exceed

22:52
3% in net returns. But here's the thing, you still can't quantify it. Now they've done that here, but it's in a very broad sense. You still really can't get to the end of the year very often with your client and say, Mr. Miss Client, this year I saved you $30,000. Unless there was something specific. And usually that something specific relates to taxes. If they have this big

23:22
mutual fund position that's about to have this massive internal capital gains distribution that they didn't know about. And you say, Hey, let's sell that before the date of record, so you don't have to get that capital gain. And you're at a loss on it anyway. And so you get to take that loss and avoid that capital gain. Otherwise, you're going to get a capital gain on a fund that you're down in value on, right, which is a kick in the pants. Let me tell you, absolutely. And we've seen it happen over and over. There's some things like that.

23:51
that you can quantify, but it's mostly really difficult, if not impossible, to quantify that value. So I would go back to this. I would say that it goes back to the episode that we did, is your advisor worth 1% if your financial advisor is only giving you investment advice? And there's plenty of Investopedia articles, US News, bank rate articles that you can read about how to invest your money. Sure. Period.

24:20
And essentially what we're talking about is even if you're even if we go back to our numbers, right, we've got we've got 30 basis points, we got 14 basis points, this is what you're getting from somebody else. And all they're doing is investing your stuff. Yeah, they're not making any decisions on, you know, they're not talking you out of turning everything to cash. They're not telling you where to pull money out of which bucket. They're not telling you put more in your IRA or, you know, more

24:50
bonds in your IRA or less, right? They're not doing any of that. They're just saying, well, give me your money and I will select some mutual funds of various sorts. And if one of them starts getting a bit bigger than the other, I'll rebalance them for you. Then that person, had you done it yourself, that person's gonna add, in this case, about a.44%. Right, but they'll charge you 1.35.

25:20
But they charged you 1.35 to do it. Yeah. So so there you go. I mean, that's that's what so that's that's your number right there. It is. It is. And of course, these are these are very broad and I didn't even see how many people were were in this study or where they got the data from to conduct this study. But but I do think it's interesting that it's that this is a it's a it's a it's an article from Vanguard. Right? Absolutely. Who is not in the business of financial

25:49
Well, yes and no. So for many years, they weren't until they figured out, hey, wait, there's actually an appetite for people to walk this journey with someone. So let's add a new tier to our services where people can get an advisor and and nothing good gets Vanguard. I mean, I get it, you know, one of my planners started at one of the big firms to it wasn't Vanguard, it was fidelity. But you know, when when you're in one of those programs, you to want to talk about a revolving door, goodness gracious, you might be assigned an advisor.

26:19
they don't necessarily promise you it's going to be the same advisor for a long right. So they do have an advisory services component, which may be some of the marketing some of the rationale for putting out reports like this, you know, to convince people to use it. It's still certainly interesting. And it and even if these numbers are not hardened fast, necessarily, I bet they're I bet they're close. Yeah, they seem

26:46
There's nothing about this that strikes me as particularly out of the range of possibility. No, not at all. Especially the behavioral coaching and the spending strategy, that ongoing guidance that has to come along that journey of retirement and not just that one time, do this and you'll be fine. That can absolutely, I mean, that alone could be up to 320 basis points. Those are the two biggest ones on the list. Right. And that's really what we spend so much of our time doing here, right?

27:14
All of the investment management pieces, that stuff has monthly tasks assigned to it in our client service calendar. That's not the most time consuming part. The time consuming part is listening to your clients, figuring out how they're currently feeling, and then addressing that with them. Right now the market's volatile and we're hearing from a lot of clients right now and that's perfectly understandable. So we're spending more of our time right now doing that behavioral coaching than we may be in other periods as well. But yeah, it is an interesting study.

27:43
I have to agree with it. But I only agree with it if that financial advisor is focusing on those right things and not just on the investment management. Right. If you're not getting, you know, what we got one, two, three, four, five, six, so there were seven items here. And you should be getting generally, you know, most of those seven. Yes, absolutely. More of some than less and less of others. But

28:09
you should be your advisor. If you're getting all seven from your advisor, there's going to be value there. It may be difficult to exactly quantify, you know, compared to you breaking your own plumbing, which you will know exactly how much that cost you both. Although the thing there, though, is that like if I go and spend $400 on plumbing supplies, you know, because I don't keep around plumbing supplies. So if if I'm going to go

28:39
if I'm going to try to fix something, I've got to go buy the extra pipe. I've got to buy the plumber's glue. I've got to buy the little stuff you wrap around the threads and, you know, those sort of things. Right. So I've got to I can calculate that cost. What I can't calculate is how much the plumber would have charged me to do it right the first time. I can quantify what I spent trying to do it myself. And I can and I can calculate what he charged to fix what I broke. Yeah.

29:08
But I can't quite, I still have, I can't figure out exactly, you know, had I just not broken in the first place, how much would it have cost, right? And so, you know, I guess with this, the interesting thing, and I don't know that they would have said it one way or the other, but if you've got, if you've got somebody that's doing all seven of these, there doesn't seem to be a situation where you get less value. Right. I would agree with that. Right. And so, so we can say if we say you doing it yourself is zero.

29:38
And then there's there's somebody else that is doing all seven of these things for you. That's going to pay off. Yeah. How much man? Yeah, I know. Who knows? But it's going it's going to pay off. It's the end result is it's going to pay off. Yeah. So I would I would encourage our clients if if you've been a DIY investor for long, you know, and that's it. Especially if you want I talked to a guy the other day that was a fan of the podcast he called and he was wanting to hire my firm until he found out

30:06
that he was going to have to transfer all of his assets to our custodian. And then, I mean, that just hit him in a way that he didn't really expect. And he said, yeah, I don't know if I can give up that control. So here's what I would tell those people that want to keep controlling their own assets. There are some financial planners out there that you can engage with that are specifically set up for the DIY investor.

30:33
And, you know, they'll, they'll be able to give you some guidance. Uh, they're not going to be able to do things for you, but then we have people that just say, look, I want to retire and have it done for me. I want to go outside and enjoy my yard, enjoy the beach, whatever it is, and have it done for me for those people. You're going to have to look for a more full service comprehensive, but you do need to find somebody who is going to make sure and cover all those and I'll tell our producer to try to get this report linked up down in the show notes. And, uh,

31:03
That chart is on page four, and you're obviously welcome to go through and read the entire report. Fantastic. Read it at your leisure. All right. Well, let's wrap this show up. We've been reminding our listeners to leave us reviews. And thank you, thank you, thank you. You've been doing such a great job of that. We've been getting some fantastic reviews, which all serve as a signal to Apple Podcast, where 74% of our listeners are, to boost our show through the ratings and give it exposure to more people. And that is so critical for us.

31:33
to continue growing this show. So thank you for that. And also be sure to go out to the Facebook group, Big Picture Retirement. Put your question there and we'll get that approved and you'll have a belly of people answering that for you. Excellent. Well, until next week, John and I will be right here bringing you to and through your very own Big Picture Retirement. Thanks for listening.